Wall Street wins bid to keep noncompete clauses in New York

Gov. Kathy Hochul vetoed legislation that would have banned employee noncompetes in New York, after facing intense pressure from Wall Street, hospitals, and business groups that opposed the measure, according to sources familiar with the matter.

The legislation (S3100) rejected by Hochul Friday would have barred employers from imposing contract language that prohibits employees or other "covered individuals" from obtaining employment after leaving their current jobs.

"After weeks of negotiations where we compromised heavily to try to pass a law that would at least ban non-competes for low- and mid-wage workers, I'm incredibly disappointed that our final offer was rejected," said state Sen. Sean Ryan, who sponsored the bill, in a statement.

Read more: What the FTC's noncompete agreement ban means for the workplace

New York would have become the second most populous state to ban these clauses, joining California, which has had the restriction in place for more than a century. Supporters of the proposal said it would spur innovation and help New York compete with California for talent and new startups, particularly in the tech sector.

State lawmakers passed the New York measure in June alongside a broader movement to restrict or ban non-competes, including proposals and enforcement actions from both the Federal Trade Commission and the National Labor Relations Board. The ultimate outcome of those federal efforts is uncertain, due in part to litigation from business groups challenging the agencies' authority to regulate employment contracts.

Hochul was the target of a lobbying effort in recent months aimed at allowing non-competes to continue in contracts for employees earning more than $250,000 per year. JPMorgan Chase, Goldman Sachs, Healthcare Association of New York, and the New York City Bar Association reported pressuring her office, lobbying records show.

The governor told reporters in late November that she supported scaling back the legislation in line with the business groups' request though a deal with state lawmakers did not ultimately happen.

Read more: Noncompete ban could boost pay without driving inflation, economists say

Minnesota this year enacted an outright ban on employee non-competes, effective July 1, the first state to do so in decades.

North Dakota and Oklahoma, along with California, have long deemed non-competes unenforceable, with only narrow exceptions. At least 11 more states plus the District of Columbia restrict non-competes under limited circumstances, blocking employers from imposing them on low- to middle-income or hourly workers.

Trade secret exception

Non-competes contractually block workers from leaving their employer to go to work for a competing company or start their own competing business. Estimates differ on how widely they're used, with the Treasury Department citing data showing about 20% of US workers are currently restrained by non-competes, while 2023 Minneapolis Fed data put the figure at 11%.

Worker advocates, labor unions, and other supporters of banning the contracts say they unfairly restrict workers' job mobility, often restraining low-wage workers who don't have access to company secrets. Industry groups such as the Business Council of New York State oppose broad restrictions on non-competes, arguing that companies generally use them for legitimate reasons and that courts already set limits on when and how the contracts can be enforced.

The New York measure would have allowed employers to continue using nondisclosure agreements aimed at protecting trade secrets and nonsolicitation agreements that prohibit an employee from leaving the company and recruiting away customers for a competing business—as long as an agreement "does not otherwise restrict competition in violation of this section."

Supporters of the rejected bill said they would continue efforts to ban non-competes despite the gubernatorial veto.

"We'll be back in 2024 and will fight to pass an even more comprehensive ban," said Paul Sonn of the National Employment Law Project.